It’s my annual “Taxes from A to Z” series! For the series, I’ll focus on terms that you might see on your tax forms and statements but not necessarily in the headlines. If you’re wondering whether you can claim wardrobe expenses or whether to deduct a capital loss, this is one series you won’t want to miss.
A is for Advance Payment Of The Premium Tax Credit (APTC).
As part of the Affordable Care Act (better known as “Obamacare”), taxpayers who enroll (or have a family member who enrolls) for health care coverage through the Marketplace may be entitled to a premium tax credit (PTC). The purpose of the PTC, which is income dependent, is to make coverage more affordable. How? It provides financial assistance to taxpayers by reducing the amount of tax you owe using a refundable credit (remember, credits are dollar for dollar reductions in the amount of tax you owe). Refundable credits are valuable: if your credit exceeds your tax, the excess credit is refunded to you. The amount that you save (and is potentially refunded) can be used to pay for healthcare.
You are eligible for the PTC if you enroll in coverage through the Marketplace because you could not get eligible coverage through an employer-sponsored plan AND you are not eligible for coverage through another government program like Medicaid, Medicare, CHIP or TRICARE. Additionally, to qualify, you can’t be claimed as a dependent by another person or file as Married Filing Separately (MFS) unless you fall under a specific exception. Finally, your household income must be between 100% and 400% of the federal poverty line for your family size. For residents of Washington, D.C., and states other than Hawaii or Alaska, that means your income must fall within the following numbers:
The amount of the PTC is generally equal to the premium for the second lowest-cost silver plan available through the Marketplace and is adjusted according to your household income. While the credit is refundable on your tax return, the actual amount of the credit can’t exceed the cost of premiums for your Marketplace plan (in other words, the credit cannot be more than you paid to begin with).
The downside of the PTC is that you have to pay out of pocket for health care premiums during the year. If you’re depending on your tax refund to help pay for your premiums, you’ll have to cut corners in other places throughout the year in order to make the numbers work.
Some taxpayers, instead, prefer to have the Marketplace figure an estimated credit to be paid directly to your insurance company in order to reduce what you have to pay out of pocket as you go along. This is called an advance payment of the premium tax credit, or APTC.
At tax time, you’ll have to reconcile the amount paid to the insurance company using the APTC with the actual credit you’re entitled to receive. Remember that the credit is income dependent so you won’t actually know the real numbers until you file your tax return. To figure the credit, you’ll complete a federal form 8962, Premium Tax Credit (downloads as a pdf) and attach it to your tax return for the year. You will need a form 1095-A to complete form 8962: form 1095-A will be mailed to you from the Marketplace (you should have it by now – if you don’t, contact the Marketplace).
Here’s the tricky part. If you owe no tax, you can get the full amount of the credit as a refund when you file your taxes (remember, it’s refundable). However, if an APTC was made directly to your insurance company and the credit on your return is less than the APTC paid out, the difference, subject to certain repayment caps, will be subtracted from your refund or added to your balance due at tax time. It’s a guessing game early on based on estimated income and personal exemptions and quite frankly, since the credit is relatively new, most taxpayers are getting it wrong.
To avoid a bad result in 2016, make sure that you report any changes in eligibility to the Marketplace during the year and, of course, when you re-enroll. You may also want to consider a midyear checkup. Changes in your circumstances that can affect the amount of the credit include:
- Changes (increases or decreases) in your household income;
- Marriage or divorce
- Birth or adoption of a child
- Change in eligibility for government-sponsored or employer-sponsored health care coverage
- Moving
If you still have questions about your Marketplace coverage, locating your form 1095-A or how to figure your credit, check out the Marketplace website.
For more on Taxes From A to Z, check in tomorrow!
